We Are Thrilled That The Market Is Climbing…But Why?

Current demand for apartment buildings in the U.S. is booming, in contrast to the homeownership rate, which is stagnating at its lowest level since 1998. Linked to this, government-sponsored mortgage companies are providing record levels of financing for apartment properties. This confluence of events is fueling a rush by investors to purchase properties, allowing lenders to recover 75% of the value of defaulted mortgages, which are tied to multifamily housing – the highest rate for all commercial properties.

The simple fact is that many potential buyers are not interested in, or cannot afford a long-term debt obligation, typically 30 years for a mortgage. In addition to this, many existing homeowners are seeking to downsize to more flexible housing arrangements.

The apartment rental market is expected to witness vacancy rates dropping below 5% - the rate that characterizes a landlord market, where high demand for rental properties justifies increased rental rates. The average apartment rental rates are projected to increase by 3.5% in 2012.

This boom in demand for rental properties has also prompted life insurance companies and commercial banks to increase their activity in the market. We are beginning to see these institutions compete for lending, in the relatively stable apartment sector, offering short-term mortgages and lending for ‘transitional’ properties, not fully occupied. To put this in context, if Freddie Mac were to finance a 4.5% interest rate for an apartment building, the capitalization rate would only be about 7.8% - a relatively low capital risk exposure.